Course description
This virtual instructor-led course provides an overview of energy derivatives and physical markets as well as the main instruments traded by the main market participants.
The course explores physical and paper transactions as well as the pros and cons of commonly used exchange-traded and OTC products. Delegates learn how to mitigate market risk of energy exposures using futures, forwards and swaps with multiple case studies. The course will also provide an overview of option contracts and hedging strategies using options and simple structures.
This applied course also covers strategic and tactical issues for alternative hedging strategies used by producers and end-users. Practical case studies show how to evaluate hedge strategies under different risk dimensions in the context of achieving business goals.
Delegates also learn best practices for oversight of derivatives activities, the trade lifecycle and valuation of energy derivatives.
Please note: an up-to-date version of Microsoft Excel is required in order to engage in market data.
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Content
Virtual Instructor-Led Session 1:
Overview of Energy Physical and Financial Markets
- Overview of energy markets, risks and players
- Case study: Risk dimensions in energy markets: Market, Credit, Liquidity, Operational, Model, Volumetric
- Risk tolerance, appetite and forward-looking risk metrics to measure and manage risk
- Trading mechanisms: Exchange-based and OTC trading (Billateral, OTC Clearing)
- Long and Short: Volumetric vs. Price Exposures
- Physical vs. Financial settlements
- Commitment of Trader Reports: Hedgers, Money Managers and Market Makers
- Entering into a futures position: Market, limit and Trade at Settlement (TAS) orders
- Entering and exiting financial hedges: Bilateral Trading vs. Exchanges
Spot Prices and Forward Curves in Energy Markets
- Spot (Cash) Prices: Main Characteristics
- Forward Price Curves: Contango and backwardation
- What does the forward curve tell us?
- Case study: Analysis of movements in WTI and Brent forward curves in Q1 2020
- Building Forward Curves for Mark-to-market and Risk Analysis
- Data sources for forward curves. Pros and cons of alternative sources.
- Forward curves vs. Price Forecasts
- Arbitrage relations and forward curves
- Arbitrage in Contango and Backwardated Markets
- Case study: Arbitrage opportunities using land and floating storage in Q1 2020
- Price Volatility in Energy Markets. Introduction to historical and implied volatility.
Virtual Instructor-Led Session 2:
Hedging with Physical Forwards and Futures
- Fixed price vs. Index physical forward contracts
- Case Study: Hedging physical purchases and sales with fixed price forwards
- Introduction to futures contracts
- Hedging with Futures: Main considerations
- The Mark-to-market Process. Clearing, collateral and margin issues
- Excel case study: Mark-to-Market and Margin calculations for a futures contract
- Valuation of forward contracts and swaps using forward curves in Excel
- Case study: Hedging revenues with physical forward vs. futures
- Excel case study: Creating a payoff diagram for linear hedge instruments with Data tables.
Hedging with Swaps and Futures
- Fixed for Floating Swaps: Key contract components
- Differences between futures and swaps
- Case study: Shipping company hedging bunker fuel purchases with swaps: Implications in Q1 2020
- Hedging a cargo purchase with swaps and futures.
- Case study: Unwinding a futures hedge to match average pricing in physical contracts
- Comparative analysis of hedging with forwards, futures and swaps
Virtual Instructor-Led Session 3:
Using Energy Options: Hedging and Speculation
- Review of options types: Calls, Puts
- Buying and Selling Options: Understanding option payoffs
- Why use options?
- Intrinsic and extrinsic value of an option
- What are the main drivers of option premiums?
- Setting revenue floors and cost ceilings (caps) with options
- Individual options vs. Strips of Options: Examples
- Case Study: Hedging against price spikes with options
- Selling options: Covered and Naked positions
- Case study: Mexico’s oil hedging programme with Asian put options for 2020
Strategic and Tactical Issues around Hedging with Energy Derivatives
- Best practices in designing and effective hedging program
- Evaluating the impact of inaction vs. hedging. Payoffs under different scenarios.
- The role of risk and regret in designing and evaluating hedging strategies
- Case Study: Analysis of main hedging strategies used by airlines before COVID-19 and implications in Q1 2020
- Hedging alternatives and Key Risk Indicators (KRIs)
- Case study: KRIs and trade-offs from alternative hedge strategies for oil producer
- Best practices in derivatives oversight: Risk policies and procedures
Course Wrap-up